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10 THE CHICAGOLAND COOPERATOR   —FALL 2019  CHICAGOCOOPERATOR.COM  similar,” explains Lisa Wagner, Vice Presi-  dent and Business Development Officer   with ConnectOne Bank in Englewood,   New Jersey. “Existing cash saved in a capital   reserve account might be short to fund such   a project, or the association might not want   to deplete all of those funds, so it will bor-  row from a bank.”  Jared Tunnell, Senior Vice President of   National Cooperative Bank with offices in   Virginia, New York, Ohio, and Alaska, cites   some more examples of big-budget to-dos:   “The  largest  ones  that  I’ve seen  recently,   say, if you’re a townhouse community, have   been roofs, siding or stucco. For   high- or mid-rise buildings, the   big line-items are facades, balco-  nies, or HVAC risers.”  A  responsible  board  will  be   aware of the inevitability of these   major  repair  projects,  as  every-  thing from building systems to   roofs to facades all face gradual   wear and tear. “These projects   are  often  necessary  15-20  years   into the existence of a property,”   notes Charles F. Withee, President   and Chief Lending Officer of the   Provident Bank, which has loca-  tions in Massachusetts and New   Hampshire. “Let’s say that you’re faced with   repairing or replacing the roofs and the sid-  ing simultaneously. If the former is going to   cost you $200,000 and the latter $300,000,   and your association is 100 units, you can   do the math on a special assessment. That’s   a big nut.”  “The benefit of borrowing, as opposed   to  coming  up  with  the  money  upfront,  is   that you’re actually using the balance sheet   of the community to borrow money, so it   doesn’t impact an individual resident on a   personal level, or affect personal credit,” ex-  plains Tunnell. “They’re using the aggregate   value of the community to borrow, as op-  posed to a specific unit. And then you can   pass on the monthly fee to the next owner.   So if you’re dealing with a 50-year-old com-  munity with 50-year-old pipes that need to   be replaced, various owners have come and   gone  who  have enjoyed those  pipes  over   that time period. Why should a handful of   individuals shoulder the burden of coming   up with that replacement money up front?   Borrowing not only allows them to spread   out the payback, but to spread out the re-  sponsibility. If a resident isn’t going to be   there for another 10 years, then they pay   their portion of the project for the five years   that they are there, and then they transfer   the remainder to the next owner. Many   communities see that as a big impact.”  From Who?! And How?!  Of course, for an association to truly   consider  taking  out  a  loan,  it  must  first   identify a qualified lender with which it can   negotiate agreeable terms and come up with   a feasible payment plan. And certain crite-  ria need to be met on the association’s side,   in order for it to prove a viable lendee.  “The association will need to have a re-  serve account that is being funded,” says   Rachel Rowley, a former vice president   with Alliance Association Bank in Oswe-  go, Illinois. “Most associations want to use   their reserves, such that they can take out a   lower loan. The reserves are actually what   helps them become qualified. Past-due ac-  counts can hinder the loan process. For   AAB, they can have no more than 10% of   their total units over 60 days past due. And   they should look for a loan that does not   contain a prepayment penalty. A bank will   not finance a project for longer than the life   expectancy of the product. When the board   is looking to take out a loan, they should   look at all of the projects that will need to   be undertaken during a specific period of   time. If they need their roof(s) taken care of   now, but may need siding taken care of in   two years, it may behoove them to take out   a larger loan and complete both projects si-  multaneously in order to avoid starting the   loan process over again a few years later.”  “Most banks, if they are assessing the   loan request correctly, will ask for a recent   capital reserve study, year-end and interim   financials, arrears report, estimates from   contractors, and  bylaws,”  adds  Wagner.   “We like to see a special assessment put in   place by the board for the homeowners to   pay the loan. This ensures that the bank will   get paid back dollar for dollar by the home-  owners.  If  the  association has  a  problem   with collecting management or assessment   fees, we would be concerned. If the board   doesn’t want to share the idea of a loan and/  or assessment with its owners, this is con-  cerning; even if the bylaws state that they do   not need approval, we would prefer a vote   by the residents anyway. It’s not worth a le-  gal battle in the future.”  It’s also worthwhile for a board to re-  search the banks in the area to ascertain  an ill-advised loan transaction, as well as   whether one may specifically specialize in  problems that can turn a loan sour down   association loans, such as many of those  the line.  mentioned in this article. “If you approach a   bank and they ask something like, ‘Oh God,  tion is only looking to get a head start on   what’s the collateral again?’ --  then you’re  capital projects,” warns Rowley. “In those   at the wrong bank, because they don’t know  cases, they should focus on increasing as-  that they’re dealing with a cash-flow loan,”  sessments to help them prepare. But an as-  warns Withee. “And there are other under-  writings to consider; we’re typically dealing  a bank can enter into.”  with seven-year terms, or possibly 10. We   calculate for an association what the debt  have borrowed too much money, and it   service is going to look like, and what they  limits their flexibility to fund projects down   need to do is look at the budget to determine  the road,” adds Tunnell. “And then from our   what they’ll need to raise in dues to cover  perspective, what we look at in terms of red   that new debt service. From there, you need  ments to owners, which could cause them   to review the significance of that increase.  legitimate cash-flow problems.”  If it’s going to be a 30%-40% spike to the   condo fee, that could be a real problem. The  those that do them all the time, on behalf   bank is going to look at the likelihood of the  of all parties concerned,” says Withee. “But   unit owners having an uprising. There’s no  the converse is also true: if you deal with   magic number to indicate that, but if the  a local bank – and maybe it’s the bank of   increase is north of 10%-15%, we’re going  the condo president – and they don’t know   to need to have a discussion. You can write  these things, you’ll have to educate them,   beyond that, certainly, but that’s an area that  and that’s going to be hard for the board.   the board should consider: how this loan  The bank will get uncomfortable, then the   will affect the condo fee. And an alternative  board will get uncomfortable. That discom-  is to keep the fee untouched, but then you’ll  fort,  for  a  traditional  commercial  bank,   probably have to have an enormous special  is going to result in no collateral, and no   assessment.”  And a board should make sure to com-  pare  proposed  interest  rates  with  market  condo fees. But that hypothetical bank fails   alternatives, and consider how whichever  to realize that the source of repayment is   rate it locks in will impact payment consis-  tency throughout the duration of the loan.  dividuals, and is actually very predictable.   “An interest rate may start at 6%, but it var-  ies,” Withee continues. “$500,000 at 6%  and never lost a penny. They’re always good   for seven years is a pretty good proxy for a  loans. But you don’t want to have to catch   loan on these types of projects. So you do a  your banker up to speed, so don’t get hung   quick litmus test as to what that will mean  up on using a board member’s favorite com-  for your condo fees, and make sure it’s not  mercial banker. Be very objective. Ask how   crazy.”  What, Me Worry?   So it’s imperative that a board consider  to do an association loan. Because, while it’s   how much it will have to raise monthly fees  not hard, it’s a specialized practice, and your   in order to pay off its debt in a timely fash-  ion, and whether its residents will reason-  ably be able to afford to do so month after   month. And there are other red flags that   may indicate that a board is entering into   “Borrowing is a bad idea if the associa-  sociation loan is one of the safest loans that   “We’ve seen cases where communities   flags are delinquencies – more   the number of units than the   balance – how many people   are not paying. We look at in-  vestor-owned units or sublets;   we like to see a majority own-  er-occupied. In major metro-  politan areas, we like to see this   number at around 50%.”  While it’s fairly unlikely,   a mass exodus of unit own-  ers could also affect the long-  term ability to repay a loan,   observes Wagner. “But more   likely would be an emergency   during the term of the loan   that requires additional assess-  “These loans are surprisingly simple for   tertiary guarantees, which means you es-  sentially have one source of repayment: the   actually diversified among 100 or more in-  We’ve done these loans for a dozen years,   many deals they’ve done, and with whom.   Make sure the bank is specifically equipped   bank needs to be prepared to do it.”             n  Mike Odenthal is a writer for The Chicago-  land Cooperator.  CONT...  THE BORROWERS  continued from page 1  “When the board is looking to take out a loan, they should look at   all of the projects that will need to be undertaken during a specific   period of time. If they need their roof(s) taken care of now, but may   need siding taken care of in two years, it may behoove them to take   out a larger loan and complete both projects simultaneously in order   to avoid starting the loan process over again a few years later.”                           — Rachel Rowley 


































































































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